Bank of Japan unexpectedly introduces negative interest rates

January 29, 2016

FX News Today

German retail sales unexpectedly declined 0.2% m/m in December. November was revised up to 0.4% m/m from 0.2% m/m reported initially. Official retail sales numbers are volatile and subject to frequent and sharp revisions and only cover less than 50% of consumption, so the negative number is not necessarily a sign of falling consumption. On the contrary, consumer confidence remains higher, the labour market is robust and low oil prices are freeing up real disposable income, which will keep consumption and domestic demand supported.

French prel Q4 GDP decelerated to 0.2% q/q from 0.3% q/q in the previous quarter, in line with expectations. The annual rate came in a tad higher than expected at 1.3% y/y. The French economy continues to be hampered by structural issues and survey indicators show that the Eurozone’s second largest economy will continue to underperform.

Bank of Japan unexpectedly introduces negative interest rates. The BoJ said it will apply a rate of negative 0.1% to excess reserves that financial institutions place at the central bank with effect from February 16. The BoJ will apply a three tier system to accounts with a positive, zero, or negative interest rate on each tier. The bank’s asset purchase program was left unchanged and the BoJ did not set a lower limits on yields of bonds purchased, which means even longer dated maturities may follow short rates into negative territory. The bias remains dovish. The BoJ said the Japanese economy has recovered mostly, with underlying inflation moving higher but stressed that recently “global financial markets have been volatile against the backdrop of the further decline in crude prices and uncertainty such as over future developments in emerging and commodity exporting economies, particularly the Chinese economy”. “For these reasons, there is an increasing risk that an improvement in the business confidence of Japanese firms and conversion of the deflationary mindset might be delayed and that the underlying trend in inflation might be negatively effective”.

 

Main Macro Events Today

EU Consumer Price Index: The headline figure is out today and is expected to come in at 0.4%, a 0.2% change from the previous number.
US GDP: The first release on Q4 GDP should reveal a 1.0% (median 0.8%) headline which would follow 2.0% in Q3 and 3.9% in Q2. We expect a $40 bln inventory subtraction coupled with a flat rate in fixed investment spending to hold down the headline. Consumption spending is expected to slow as well, although less dramatically to a 1.9% clip from 3.0% in Q3.

US Michigan Consumer Sentiment: The second release on January Michigan Sentiment is out today and should reveal a 93.5 (median 93.1) headline following 93.3 in the first release and 92.6 in December. Other confidence measures have improved for the month with the IBD/TIPP poll ticking up to 47.3 from 47.2 and consumer confidence rising to 98.1 from 96.3. Apart from this, Michigan Sentiment displays a tendency towards upward revisions in the second release.

US Chicago PMI: January Chicago PMI is out on Friday and is expected at 44.0 from 42.9 in December and 48.7 in November. Already released measures of January producer sentiment have weakened and the remaining releases look poised to remain depressed in January. We now expect the ISM-adjusted average of all measures to fall to a cycle-low 49 after holding at 50 since September.

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